Many still see the euro as the heir of the old Deutschmark despite the currency union and despite the fact that the debt crisis in countries other than Germany weigh on the value of the currency.
The euro-zone’s trade balance can justify this stance: Germany’s surplus pushes the whole region to a surplus. Germany’s output and employment levels are indeed at highs, but there are worrying signs that this might not last too long.
- Low PMIs: these forward looking indicators are falling, with manufacturing pointing to fast contraction.
- Business confidence is falling: After a few positive months, both of Germany’s important think-tanks, ZEW and IFO pointed a depressing picture for the future.
- Retail sales disappoint: Month after month, consumers fall short of economists’ expectations.
- Global demand is falling: Germany enjoyed a lot of demand from Asia and especially China. This is slowing down. Also the troubles in other European countries are beginning to weigh on Germany.
All in all, the euro continues to rock mostly on the debt crisis. Nevertheless, if the German figures continue disappointing in July (this seems likely), we could see the flows coming out of Germany and the euro.
The impressive 0.5% growth in Q1 saved the whole euro-zone from an official recession. It seems that Germany’s output squeezed in Q2 and will drag the zone down rather than up.
Regarding the debt crisis and Germany, it’s important to note that Germany has so far provided loans to troubled countries through the euro-wide EFSF mechanism. It hasn’t taken a loss so far. Admitting that some money will not be paid back will certainly help. However, taking a loss is a political challenge in Germany, and would also weigh on the euro as investors would see it as less safe.
This article is part of the Forex Monthly Outlook. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.Get the 5 most predictable currency pairs